Knowing your numbers, what it costs to run each area of your business and having timely information are vital to success. When it comes to make or break, cash is oxygen. You’ve heard the phrase CASH IS KING and it is one of the most important concepts in running a business. If profits go up, cash goes up. A business that has less and less cash on more turnover is headed for broke.
Maintaining positive cash flow ensures a sustainable, healthy business. If your operating cash flow is smaller than your profits, it’s time to check the balance sheet and look for telltale signs of cash leaks. This is a key role that a finance director would be keeping an eye on. Before we get into the balance sheet, let’s look at quick, easy steps that you can take to improve cash flow immediately for your business.
Tips for improving your cash flow
First of all, the best way to predict your future is to create it. Forecasts aren’t perfect, but having a picture or a roadmap in front of you can help predict the terrain. Your P&L is theory, cash is fact. It’s vital to know what types of cash you have and what’s expected to happen to it, what you owe and what you’re owed at all times. Cash flow…. It comes in and it goes out so plan ahead.
Aged debtors, aged receivables. Whatever you want to call it, this is something that plagues every business. 30% of small businesses in the UK have considered or have taken out finance to cover cash flow issues caused by late payments.
No one likes to chase debtors and it takes time. To start with, automate your workflow as much as possible. You can set automated reminders at set intervals in Xero as well as sending statements to all your clients at once with one click.
It’s important to prioritise your debtors too – highest amounts, longest outstanding and make it a priority to follow up and chase regularly and consistently. If it’s not something you like to do (because who does) then outsource the work. But remember, it’s your money and you are not a bank. Get tough on implementing penalties for late payments!
Invoicing that works for you
Is it time to review your invoicing policy? Do you invoice at the end of a job? It’s key to invoice as quickly as possible when you’re not in a cash business and look at options for staged billing if you do project work. A huge profit and cash leak for many of our clients, who are serviced based businesses, is caused by ‘scope creep’. Make sure you have systems and processes in place to charge for extra work and let clients know as soon as possible if this is the case.
Customers owing you money is like a free loan you’re giving them. Left unchecked it can leave you in a position where you can’t purchase what you need, pay the wages or get into sticky situations with your suppliers.
Work out your average debtor days here and now, go on grab a pen and let’s do this :
Let’s set a goal to reduce your debtor days by ____ and list three things you can commit to and implement quickly to get the ball rolling.
Here are some cash flow improvement strategies to consider:
- Automate your workflow and send reminders. While you’re doing this it’s a good time to do a spot check and make sure invoices are being sent to the appropriate contact and correct email address.
- Embrace tech! Using online platforms such as Stripe allows you to take online payments from customers instantly. Stripe integrates easily with Xero so you can get paid quicker.
- Be nice but to the point where you must implement late fees. The law says that a payment is late 30 days after the invoice is sent or the goods/services have been provided and the ‘statutory interest’ is 8% plus the Bank of England base rate on commercial transactions.